Business Context and Reporting Period
This Form 8-K, dated September 29, 2022, is filed by Chardan NexTech Acquisition 2 Corp. (to be renamed Dragonfly Energy Holdings Corp. upon closing). The filing details the execution of a Term Loan Agreement and Warrant Agreements in connection with a proposed business combination with Dragonfly Energy Corp. The transaction is intended to refinance prior indebtedness, support the combination, and provide working capital.
Key Financial Metrics and Debt Structure
Term Loan Facility
- Principal Amount: $75 million senior secured term loan.
- Lenders: Initial Term Loan Lenders include CCM Investments 5 LLC (Chardan Lender) and EICF Agent LLC, with a backstop commitment from a third-party lender.
- Use of Proceeds: Refinancing prior debt, funding the business combination, working capital, and transaction fees.
- Maturity: Four years from the Closing Date.
- Amortization: 5% per annum beginning 24 months after closing.
- Interest Rate Structure:
- Until April 1, 2023: Adjusted SOFR (min 1%) + 13.5% margin (7% cash, 6.5% paid-in-kind).
- Until October 1, 2024: Adjusted SOFR + 7% cash + 4.5% to 6.5% paid-in-kind (based on leverage).
- Thereafter: Adjusted SOFR + 11.5% to 13.5% cash (based on leverage).
- Prepayment Premiums: 5% (Year 1), 3% (Year 2), 1% (Year 3), 0% (Year 4+).
Warrant Agreements
- Penny Warrants: Issued to lenders for 5.6% of Holdings' common stock on a fully diluted basis (increased from 3.6%). 10-year exercise period.
- $10 Warrants: Issued to lenders for 1.6 million shares at $10 per share. 5-year exercise period with cashless exercise provisions.
- Anti-Dilution: Warrants include weighted average anti-dilution protection, excluding issuances under a planned $150 million equity line of credit sold above $5.00 per share.
Financial Covenants
- Minimum Liquidity: $10 million unrestricted cash (monthly) starting December 31, 2022.
- Senior Leverage Ratio: Triggered if quarterly average liquidity is below $17.5 million. Maximum ratios range from 6.75:1.00 (Q4 2022) down to 3.00:1.00 (Q2 2025+).
- Fixed Charge Coverage: Minimum 1.15:1.00 if liquidity falls below $15 million.
- Capital Expenditures: Capped at $500,000 per quarter if trailing twelve-month EBITDA is less than $15 million.
Material Changes and Unusual Items
The filing discloses a material increase in the equity kicker provided to lenders. The Penny Warrants were increased from 3.6% to 5.6% of the company's fully diluted common stock, which will proportionately dilute other stockholders. Additionally, the company is subject to mandatory prepayments using 25% to 50% of excess cash flow commencing with the fiscal year ending December 31, 2023.
Guidance, Outlook, and Risks
The filing contains forward-looking statements regarding the business combination, future financial results, and market growth. Management highlights significant risks, including:
- Failure to obtain stockholder approval or satisfy closing conditions.
- Inability to complete the PIPE investment, term loan, or equity line of credit.
- Operational risks related to solid-state cell optimization and mass production.
- Supply chain disruptions, particularly regarding suppliers in China.
- Impact of the pandemic and the Russian/Ukrainian conflict.
- Failure to meet Nasdaq listing standards post-combination.
The filing explicitly states that neither the SEC nor any state agency has approved the transaction or passed upon its fairness.
Investor Verification Checklist
- Verify the final closing date of the business combination and the Term Loan.
- Confirm the effectiveness of the registration statement for the planned $150 million equity line of credit to avoid warrant share increases.
- Review the definitive proxy statement/prospectus (Form S-4) for detailed risk factors and voting instructions.
- Monitor the company's ability to maintain the $10 million minimum liquidity covenant starting December 31, 2022.
- Assess the impact of the 5.6% Penny Warrant dilution on pro forma ownership.